War with Iran delivers another shock to the global economy
[March 10, 2026] By
PAUL WISEMAN
WASHINGTON (AP) — The war with Iran is doing collateral damage to the
world economy.
The conflict is driving up energy and fertilizer prices; threatening
food shortages in poor countries; destabilizing fragile states such as
Pakistan; and complicating options for the inflation fighters at central
banks like the Federal Reserve.
Causing much of the pain: the Strait of Hormuz — through which a fifth
of world’s oil passes — was effectively shut down after the U.S. and
Israel launched missile strikes Feb. 28 that killed Iranian leader
Ayatollah Ali Khamenei.
“For a long time, the nightmare scenario that deterred the U.S. from
even thinking about an attack on Iran and which got them to urge
restraint on Israel was that the Iranians would close the Strait of
Hormuz," said Maurice Obstfeld, a senior fellow at the Peterson
Institute for International Economics and former chief economist at the
International Monetary Fund. “Now we’re in the nightmare scenario."
With a key shipping route cut off, oil prices have surged — from less
than $70 a barrel on Feb. 27 to a peak of nearly $120 early Monday
before settling closer to $90. They’ve taken gasoline prices with them.
According to AAA, the average price of U.S. gasoline has shot up to
$3.48 a gallon from just under $3 a week ago. Prices could be felt even
more significantly in Asia and Europe, which are more dependent on
Middle Eastern oil and gas than the United States.
20 million barrels of oil a day go missing
Every 10% increase in oil prices — provided they persist for most of the
year — will push up global inflation by 0.4 percentage points and reduce
worldwide economic output by as much as 0.2%, said Kristalina Georgieva,
managing director of the International Monetary Fund.
“The Strait of Hormuz has to be reopened," said economist Simon Johnson
of the Massachusetts Institute of Technology and recipient of the 2024
Nobel memorial prize in economics. “It’s 20 million barrels of oil a day
going through there. There’s no excess capacity anywhere in the world
that can fill that gap."
The world economy has shown it can take a punch, absorbing blows from
the Russian invasion of Ukraine four years ago and from President Donald
Trump’s massive and unpredictable tariffs in 2025.
Many economists express hope that global commerce can stagger through
the latest crisis.
“The world economy has shown itself capable of shaking off significant
shocks like broad U.S. tariffs, so there is room for optimism that it
will prove resilient to the fallout of the war on Iran," said Eswar
Prasad, professor of trade policy at Cornell University.
Timing is everything
Especially if oil prices can fall back to the $70-to-$80-a-barrel range,
wrote economist Neil Shearing of Capital Economics, "the world economy
may absorb the shock with less disruption than many fear."
But a lot of ifs remain.
“The question is how long is it going to go on?" said Johnson, also
former IMF chief economist. “It’s hard to see Iran backing down now that
it’s announced this new leader" – Mojtaba Khamanei. The son of the slain
ayatollah is believed to be even more of hardliner than his father.
Also muddying the outlook for an end to the crisis is uncertainty about
what the United States is trying to achieve. “This is all about
President Trump," Johnson said. “It’s not clear when he’s going to
declare victory."
Economic winners and losers
For now, the war is likely to create economic winners and losers.
Energy importers — most of Europe, South Korea, Taiwan, Japan, India and
China — will get clobbered by higher prices, Shearing wrote in a
commentary for London’s Chatham House think tank.
Pakistan finds itself in an especially bleak position. The South Asian
country imports 40% of its energy and relies especially heavily on
liquified natural gas from Qatar, supplies of which have been cut off by
the conflict. Higher energy prices will squeeze Pakistani families and
damage their economy.
[to top of second column] |
An American flag flies outside a gas station as gasoline prices are
displayed on Sunday, March 8, 2026, in Portland, Ore. (AP
Photo/Jenny Kane)
 Far from cutting interest rates to
provide some relief, though, the country’s central bank will
probably have to raise them instead, say economists Gareth Leather
and Mark Williams of Capital Economics. That is partly because
inflation remains uncomfortably high in Pakistan — and higher energy
prices threaten make it worse.
But oil-producing countries outside the warzone — Norway, Russia,
Canada — will benefit from high oil prices without the risk of
missile and drone attacks.
Energy isn’t the only issue. Up to 30% of world fertilizer exports –
including urea, ammonia, phosphates, and sulfur – pass through the
Strait of Hormuz, according to Joseph Glauber of the International
Food Policy Research Institute.
Disruption in the Strait has already cut off fertilizer shipments,
raising costs for farmers – and is likely pushing food prices
higher.
“Any countries with significant agriculture sectors, including the
United States, would be vulnerable," Obstfeld said. “The effects are
going to be most devastating in low-income countries where
agricultural productivity may already be challenged. Add this extra
cost component and you get the prospect of significant food
shortages."
Where things stand in the US
The United States, now a net exporter of energy, should gain
slightly overall from higher oil and gas prices. But ordinary
families will feel the pain at a time when Americans are already
furious about high costs ahead of November’s midterm elections.
U.S. households pay an $2,500 a year, or nearly $50 a week, to fill
up their cars, said Mark Mathews, chief economist at the National
Retail Federation. A 20% increase in gasoline prices means an extra
$10 a week out their budgets, forcing them to cut back elsewhere.
“If I have to pay more for an essential, then I would reduce a
discretionary item,” Mathews said.
If oil prices remain around $100 a barrel, analysts at Evercore ISI
calculated, the resulting higher gasoline prices will wipe out for
most Americans the benefits of higher tax refunds this year arising
from Trump’s 2025 tax cuts. Only the top 30% would still see a gain.
A quandary for central banks
The Iran crisis also puts the world’s central banks in a bind.
Higher energy prices feed inflation. But they also hurt the economy.
So should central bankers raise rates to curb inflation — or cut
them to give the economy a lift?
The Fed is already divided between policymakers who think a weak
American job market needs help from lower rates and those still
worried that inflation remains stuck above the central bank’s 2%
target.
“Their minds will easily go to the 1970s," Johnson said, when
conflict in the Middle East and an Arab oil embargo sent oil prices
rocketing. Central bankers are haunted by the memory that their
predecessors “didn’t get it right in the 1970s. They thought it was
a temporary shock. They thought they could accommodate with lower
interest rates, and they ended up regretting that because inflation
became much higher."
Johnson predicted that higher energy prices ignited by the war with
Iran are “going to massively intensify the debate inside the Fed"
and make U.S. rate cuts less likely.
____
AP Retail Writer Anne D’Innocenzio in New York and AP Economics
Writer Christopher Rugaber in Washington contributed to this report.
All contents © copyright 2026 Associated Press. All rights reserved |
